Halliburton’s North American revenue rose in the first quarter, thanks to growing demand for onshore services from shale producers, writes Kevin Godier.
What: Halliburton is benefiting from the rebound in shale drilling.
Why: Oil producers are bringing more rigs back to work in shale plays, as well as stepping up completions.
What next: Halliburton will face new competition in the fracking market from the OneStim joint venture.
Halliburton has reported its first improvement in quarterly revenue since the end of 2014, illustrating how oilfield services companies are being buoyed by the rebound in shale drilling in 2017. In its first-quarter results, released on April 24, the world’s second largest oilfield services provider said its revenue from North America rose 24.4% to US$2.2 billion, driven by growing demand for onshore oil well construction and pressure pumping services. In international markets, by contrast, Halliburton’s revenues fell 8% sequentially to around US$2 billion, but the company’s first-quarter net loss narrowed to US$32 million. This was a considerable improvement on the US$2.4 billion loss recorded in the first quarter of 2016, and included the payment of a US$335 million settlement charge related to the 2010 Macondo well blowout. Halliburton’s overall revenue rose 1.9% to US$4.28 billion.
“North America activity increased rapidly during the first quarter, which was highlighted by our US land revenue growth of nearly 30%, outperforming the sequential average US land rig count growth of 27%,” Halliburton’s CEO, Dave Lesar, said in a statement.
“There is no doubt that the pace of completions activity is catching up with the rig count, and we expect to see that relationship continue into next quarter, most certainly,” said Halliburton’s interim chief financial officer, Robb Voyles, on a post-earnings call.
Houston-based Halliburton, the world’s largest provider of hydraulic fracturing services, released its results three days after rival Schlumberger, which posted its first year-on-year quarterly increase in revenue in two years, at 5.7%. Schlumberger’s numbers also broadly reflected the trend of US shale producers putting more rigs to work, buoyed by oil prices that have stabilised at around US$50 per barrel amid a slump that has so far lasted almost three years despite recent signs of recovery. While its offshore activity declined, Schlumberger achieved 16% sequential revenue growth and 66% incremental margins in its fracking and directional drilling services in the US. But Schlumberger’s business segments generate more than 60% of their revenue outside North America, resulting in a marked contrast between its North American and international results.
Adjusting to lower prices
The recovery being seen in the US tight oil industry can be partly attributed to the oil price sitting near the US$50 per barrel mark, supported by the OPEC agreement to cut production at the end of 2016. The rebound has also been spurred by improved drilling techniques and technologies that have enabled producers to produce shale oil more profitably at lower prices than before.
The end result, according to Halliburton, is that oil producers are completing nearly as many wells as they are drilling. This marks a major change from the beginning of 2016, when drillers curtailed operations, leaving wells drilled but uncompleted (DUC) as they waited for higher oil prices. Data released last week by Baker Hughes indicate that the number of rigs drilling for oil in the US has now risen for 15 consecutive weeks.
Growing demand for oilfield services across all the leading North American shale regions is also allowing Halliburton to charge higher prices, after it and its peers were forced to offer steep discounts to exploration and production companies during the worst of the oil bust. Having said in October 2016 that it was committed to raising prices again, Halliburton management noted in its fourth-quarter results, announced at the start of 2017, that the company was walking away from customers that refused to pay higher prices.
“We are basin agnostic in terms of how we are positioned,” Halliburton’s president, Jeffrey Miller, said on the post-earnings call. “Clearly the Permian has the most activity. I like the way we are positioned in each market. Fleets are busy, and we are starting to see the calendar firm up,” he added.
Halliburton and Schlumberger both said they had been burdened by the costs associated with reactivating idled drilling and fracking equipment to meet the increase in demand, although Schlumberger – which generates much of its revenue outside the US – has been more cautious about redeploying its US fracking equipment than Halliburton.
In a March 2017 operational update, Lesar noted that Halliburton was doubling its rate of equipment reactivation and bringing the bulk of it to the front of the year, taking a hit on income. “Based on current customer demand, we are deploying nearly double the pressure pumping equipment than we originally anticipated reactivating for the entire year,” he said. “And we are bringing that reactivated equipment out in the first 6 months of the year instead of over the course of the year. Now this was a costly short-term decision, but one that will pay dividends as the year goes on.”
Halliburton is facing greater competition in the fracking market after Schlumberger and Weatherford International announced in late March that they were combining their North American shale expertise into the OneStim joint venture. Weatherford and Schlumberger have both been suffering from low rates of return on their shale assets since the oil price crash, and are hoping that the partnership will enable them to compete for market share and improve profitability. The two will combine lower-margin commodity services such as pressure pumping with higher-end technologies that they say will make the overall service more valuable to explorers and drive margin improvements. The combined fracking pump capacity is expected to put the joint venture on a par with Halliburton in terms of horsepower.
Meanwhile, smaller oilfield services provider Baker Hughes, along with CSL Capital Management and West Street Energy Partners (WSEP), has re-launched BJ Services as a pure-play North American onshore pressure pumping company. The move, which saw Baker Hughes contribute its North American onshore cementing and fracking businesses, illustrates the manoeuvring under way among services providers as they attempt to make their businesses operate more profitably.
Halliburton is optimistic about revenue from its completion and production unit and margins both rising in the second quarter as reactivation costs decline. “In North America, US$50 oil prices would drive a significant increase in activity,” Miller said. While Halliburton’s reactivation costs are still predicted to cut into profits in the second quarter, its current market dominance means that the full availability of its services would likely make North American shale more economic. Considering Halliburton’s reliance on North America, the company’s results are therefore likely to improve further over the remainder of 2017, but it will also face greater competition from OneStim from the second half of the year onwards.